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Dramatic shake-up for British banking sector

The British government will sharply shake up the banking sector by selling off assets from RBS and Lloyds to form new banks. The government will provide 30 billion pounds to support the changes. HSBC, meanwhile, is to axe 1,700 jobs.

AFP - Britain will force state-rescued banks RBS and Lloyds Banking Group to sell assets in a massive shake-up of the banking sector but will support them with 30 billion pounds, the government said on Tuesday.

Britain expects new banks to be born as a result of the break-ups which are the result of pressure from EU competition authorities.

The parts being separated from the parent groups add up to about 10 percent of Britain's troubled retail banking market, which Tuesday suffered further casualties as global giant HSBC said it was axing 1,700 posts.

In return for more state aid, Lloyds and Royal Bank of Scotland (RBS) will have to cut bonuses paid to top staff and increase lending to businesses and individuals in recession-hit Britain.

Lloyds meanwhile said it would launch a record 13.5-billion-pound (21.6 billion dollars, 14.7 billion euros) rights issue, representing the biggest-ever sale in Britain of new shares to existing shareholders.

Tuesday's announcements come one week after the European Commission approved the state aid used in plans to break up and sell Britain's nationalised bank Northern Rock.

"Today will be the day that we see the beginning of the greatest changes in UK high street banking ever," said senior trader Manoj Ladwa at ETX Capital.

"The creation of three new banks, dramatic divestments from both Lloyds and in particularly RBS, mammoth fund raising for both banks including the British taxpayer dipping into their pocket."

Prime Minister Gordon Brown said the shake-up would create competition and put RBS and Lloyds on a more solid footing.

"I believe at the end of the day the banks will be paying money to the British public and not the other way round," Brown said.

This is largely because of Lloyds' related decision not to participate in a huge government- backed asset protection scheme.

"To promote greater competition in UK banking, and meet EU state aid rules, the banks will ... be required to make divestments of significant parts of their businesses over the next four years," the Treasury said in a statement.

The government does not want major British rivals of RBS and Lloyds, such as HSBC or Barclays, to scoop up the ailing lenders' assets.

This could allow the country's biggest retailer, supermarket giant Tesco, and Richard Branson's Virgin Group -- rumoured to be interested in expanding their own banking services -- an easier run into the industry.

Spanish banking giant Santander may also be interested in buying part of the Royal Bank of Scotland, a Spanish newspaper said Tuesday.

"We are going to see at least three new banks operating on the British high street in the next four years and that is very good news for the British taxpayer, the British consumer," Treasury Minister Paul Myners told the BBC.

The European Commission meanwhile said it was in the last lap of negotiations with the British treasury on restructuring the state-rescued banks.

Under the government's plans, the state will pump 25.5 billion pounds into Royal Bank of Scotland, which in turn will place 282 billion pounds of high-risk debts into the government's toxic asset insurance scheme -- a lower amount than originally planned.

As a result of the move, the state's economic interest in RBS will climb to 84 percent from 70 percent. In addition, RBS will have access to a contingency fund of eight billion pounds.

The share price of RBS plunged 10.70 percent to 34.51 pence on the FTSE 100 index of leading companies, which was down 1.34 percent nearing the close.

Lloyds stock rose 3.29 percent to 87.8 pence as the group also said that its record rights issue would allow it to avoid the state's toxic asset insurance plan -- but it would have to pay a 2.5-billion-pound fee to the government as a result.

The government said it would take part and maintain its 43-percent stake in Lloyds Banking Group -- created in January when Lloyds TSB bought rival lender HBOS in a state-brokered deal.